Point Carbon: ExxonMobil Most Exposed under Cap and Trade

Nov 06, 2009

Point Carbon identified the winners and losers in a proposed cap-and-trade system for greenhouse gas emissions in the United States in its latest report Carbon Exposure (subscription required) unveiled at its annual fall conference Carbon Market Insights Americas.

Point Carbon is a provider of independent news and market analysis for European and global power, gas and carbon markets.

Within the power and oil sectors, representing 40 percent of covered emissions in the market, the greatest winners and losers come from the power industry. Atlanta-based Southern Company would suffer the most as a single entity under the cap while Exelon Corporation will likely profit.

The report is the first to identify the major market participants and quantify the financial impact of a carbon cap. The analysis uses the scope and structure proposed under the Kerry-Boxer bill (S.1733) presently debated in Senate.

"Now, we can begin to see which firms would have larger market share and corresponding ability to move carbon markets." noted Emilie Mazzacurati, head of Point Carbon's North American research division. "We can also see which companies will remain financially attractive, and which will be more exposed to carbon risk."

The most vulnerable companies come from the power sector. Namely, these are Southern Company, American Electric Power and Duke Energy. Compliance could cost Southern 12 percent of its operating income, AEP 11 percent of its operating income and Duke 5 percent of its operating income. This is in spite of the fact that the largest electric company in the United States, American Electric Power or AEP, emits less than half of what ExxonMobil emits. AEP's gross cost of carbon, a company's total emissions multiplied by the price of allowances, would be $2.3 billion while Southern Company's would be $2.2 billion. However, AEP is anticipated to recover 90 percent of its net carbon cost thru carbon revenues.

"This information may entice some companies to explore pre-compliance strategies such as offsets now, since that might reduce costs later." said Mazzacurati. "If the more vulnerable companies were to do this now in a thorough and strategic manner, they could hedge their exposure considerably."

Point Carbon's report makes clear that volume of emissions or nominal size of compliance costs is not correlated positively to the financial impact on the company. Indeed, the largest emitter in the United States is ExxonMobil, alone accounting for over 6 percent of all U.S. emissions. Yet ExxonMobil's operating income will be only slightly affected under the system.

Using Point Carbon's forecasted average price of carbon at $15 for the first few years of the program, ExxonMobil would need to pay $5.9 billion annually to purchase the carbon allowances needed for compliance. This corresponds to 8 percent of ExxonMobil's operating income. However, the company would likely recoup $5.6 billion by carbon revenues through a small increase (5 percent) in gasoline prices, leaving its final cost of carbon at $277 million and making its gross carbon cost small when contrasted to its operating income of $84.1 billion.